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Economic Growth' - rashad

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To reap the benefits of most technological change, capital must increase.

Some of the most powerful and far-reaching technologies are embodied, at least partly, in human capital.

For example, language, writing, and mathematics.

But most technologies are embodied in physical capital.

Productivityalso depends on how well production is organized, and the economic system in place. Russia has excellent human capital, lots of physical capital, and large amounts of natural resources; but labor productivity is low because the economic system and the organization of production are still very far from the most appropriate for permitting high output and output growth.

Better management, better organization, and a better economic system can make large differences to output per labor hour, i.e. labor productivity.

2. An increase in human capital and/or a technological advance shift the productivity curve upward from PC0 to PC1.

With this increase in human capital and/or technological advance, real GDP per hour of labor increases from $20 to $25 when there is $30 of capital per hour of labor and from $25 to $32 when there is $60 of capital per hour of labor.

Advances in technology and the accumulation of capital bring increased productivity and increased real GDP per person.

Classical growth theory says that the increase in real GDP per person will be temporary because prosperity will induce a population explosion and the population explosion will decrease real GDP per person.

The forces of competition squeeze profits, so to increase profit, people constantly seek either lower cost methods of production or new and better products for which people are willing to pay a higher price.

Two other facts play a key role in the new growth theory:

Many people can use discoveries at the same time – technical knowledge is potentially a ‘public good.’

An increase in capital per hour of labor brings a movement along the productivity curve PC0 and the expansion of human capital and technological change increase labor productivity and shift the productivity curve upward to PC1.

New growth theory fits the facts more closely than do the other two theories. However, there are still many anomalies in terms of trying to explain why growth rates are different in different countries and in different time periods. Understanding how to improve growth performance is one of the great challenges still facing economists [and others].

Economic freedom requires the protection of private property — the factors of production and goods that people own.

Property rights

The social arrangements that govern rights to use and dispose of property. Protection of private property implies that private individuals, households, and firms are able to own, use, and dispose of property within clearly defined parameters and rules. The precise nature of property rights varies substantially from place to place and time to time, and they are rarely absolute.

Economic growth occurs when the incentives to save, invest, and innovate are strong enough. These incentives require clear rules on property rights, and confidence in the rule of law – i.e. predictability.